Entering the stage of technological frontier, China’s innovation mechanism gradually turns to skill-biased technological progress. Relying on large-scale market advantage and huge industrial chain division system, the division of labor of industries dominated by external circulation gradually shifts to “domestic great circulation”. Based on the production decomposition model of forward correlation, this study calculates the domestic value-added shares of different industries from the perspective of the composition of national gross value-added, and empirically tests the influence and mechanism of skill-biased technological progress on the variation of domestic value-added shares of division. It is found that skill-biased technological progress significantly increases the value-added share of domestic division, and the conclusion remains robust after dynamic panel estimation and replacement of explanatory variables. The expansion of domestic market demand and local innovation of intermediate goods are the two main influencing mechanisms. The sub-sample results show that the skill-biased technological progress of “science-based” and “specialized supplier” industries has a more significant effect on the increase of value-added shares. Based on the main conclusions, relevant policy recommendations are put forward as follows. Firstly, it is necessary to further correct the allocation distortion of labor market, improve the allocation efficiency of institutional scientific research talents, and optimize the optimal allocation of innovative talent resources between regions and industries. Secondly, we should accelerate technological innovation leading to highly skilled labor-intensive industries, expand the industrial scale of the knowledge sector, and strengthen the originality of local intermediate products. Thirdly, we should give full play to the advantages of China’s super-large market and the potential of domestic demand, form competitive advantages in the transformation of frontier technology innovation achievements and large-scale industrialization, with the aim of forming a domestic value chain led by China in the broader high-tech industries.